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May 2022
RESEARCH BRIEF No. 127
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Economic Impact of Russia-Ukraine Conflict: An Indian Perspective
(5.3%), iron and steel (5.1%), miscellaneous Public Services: The impact of higher oil prices could
chemical products (4.9%), and electrical machinery affect India’s expenditure budget, leading to fiscal targets
and equipment (4.2%). going awry. Impact of high crude oil prices on Government
Imports: Animal or vegetable fats and oils (sunflower finances could lead to Government of India cutting back on
seed oil in particular) accounted for almost 3/4 th of capital outlays.
India’s imports from Ukraine in 2021-22. This was
followed by fertilizers (12.7% of imports), inorganic Trade Channel and Impact on Current Account
chemicals (7.6%), project goods (1.2%), and wood Since pharmaceutical products, being necessary goods, are
and articles (1.1%). currently exempted from sanctions, India’s pharmaceutical
exports which are the largest exports from India to both
IMPACT OF RUSSIA-UKRAINE CONFLICT ON Russia and Ukraine are expected to witness only a marginal
THE INDIAN ECONOMY impact. Russia and Ukraine are also major destinations of
Russia - Ukraine conflict and the set of punitive sanctions Indian tea exports, and the crisis is expected to create
imposed on Russia by the US and its allies, especially an over-supply of tea in the domestic market, leading to
European Union countries, have the potential to impact falling tea prices. At the same, a depreciating Indian rupee
India through multiple channels. is expected to benefit India’s export-oriented sectors by
making exports competitive. Disruptions in supply chains,
Surge in Input Costs and Impact on Macroeconomic
along with rise in export insurance costs and shipping
Variables freights are also expected to raise the trading costs of Indian
An expected resultant commodity price surge could lead exporters. As regards imports, India’s import costs would
to a severe increase in input costs, leading to increase rise owing to higher prices of crude, fertilizers, metals, and
in the product prices for exports and goods for domestic edible oil. India’s external sector remains highly vulnerable
consumption. The impact of higher crude oil prices for a to global crude oil price movements and is expected to
prolonged period on India’s macroeconomic fundamentals continue to remain so in the near future.
could be severe, affecting through various channels such
as GDP growth, inflation, savings, exchange rate of rupee, On the other hand, rise in commodity prices may prove
interest rates, trade, current account and finally on India’s favourable in case of sectors such as steel and aluminium,
fiscal deficit. leading to higher realisations for domestic primary steel
makers and aluminum smelters. However, it would have
Exchange Rate: High oil prices and volatility prevailing negative impact on the construction, real estate, and
in global markets have resulted in rupee coming under automobile sectors which are the end users of these
significant pressure. Higher oil prices would result products.
in higher trade deficits and leading to sharp rupee
depreciation. Exchange rate is likely to remain volatile due With Russia and Ukraine producing around 75% of the
to the uncertainties related to the conflict, risk aversion neon gas (Ukraine alone about 70%) used to manufacture
tendencies, the spike in Brent crude oil prices and policy semiconductors, disruptions are expected in the automobile
tightening by the Federal Reserve. sector which is already undergoing disruptions from the
semiconductor shortages. Russian sanctions are expected
Inflation: A rise in global crude prices and heightened to further curtail semiconductor production. With Russia
uncertainties would increase the domestic price of crude being one of the largest producers and suppliers of
products and increase domestic inflation. The continuous palladium globally, there has been a significant increase
hardening in crude oil prices exacerbated by the Russia- in the price of palladium amidst uncertainties surrounding
Ukraine conflict, other geo-political concerns, and its Russian sanctions.
impact on the Indian Rupee pose the biggest risk to the
WPI as well as the CPI inflation. The impact of rising crude Thus, an expected increase in import bills due to elevated
oil prices on WPI and CPI inflation would be influenced food, fuel, and fertilizer prices; moderation in domestic
by the extent of pass through to domestic retail prices of demand in major trading partners and growing uncertainty
fuels. surrounding capital inflows may further widen India’s
current account deficit and thus impacting reserves in the
Financial Services: Flight to safety has resulted in capital short term.
outflows from emerging economies, including India.
Foreign Portfolio Investment (FPI) flows are expected Heightened Defence Spending
to remain volatile in the coming months due to Russia- India’s present military arsenal is heavily stocked with
Ukraine conflict and its fallout in the form of sanctions, Russian-made or Russian-designed equipment, purchased
high inflation and expected increase in interest rate by the mostly under government-to-government contract. Due to
Federal Reserve. Continuous FPI outflows and heavy selling Russia-Ukraine conflict, India’s reliance on Russia for arms
in domestic equities could weigh on the equity markets imports are expected to come down. However, this would
and India’s market valuations. Indian companies having lead to India diversifying its import sources, leading to
exposure to Russia, Ukraine and other European companies increased defence spending for the country. On the other
would come under the scanner, with chances of stress in hand, increased efforts by the Government of India to
their financial conditions. increase the domestic production of defence equipment
3
Economic Impact of Russia-Ukraine Conflict: An Indian Perspective
under 'Make in India' would reduce India’s dependency on Rupee-rouble payment mechanism is one solution. These
Russian based defence products and divert part of its huge transactions could be facilitated through selected banks,
defence budget to meeting development needs and other which is already in place for several of India’s defence
priority sectors. transactions with Russia. Under the “rupee-rouble”
exchange scheme which existed prior to 1991, prices
Exposure of Indian Banks in Russia and payments of goods were designated in roubles and
Except for the Commerical Indo Bank LLC (JV of SBI and rupees according to a mutually agreed rate of exchange,
Canara Bank), Indian banks do not have any subsidiaries, but accounts were settled in goods. The goods traded
branches or representative offices in Russia, and trade were, however, specified and restricted, and purchases and
finance businesses for Indian banks are relatively less transactions were conducted under the supervision of the
because of the limited trade size between India and Reserve Bank of India.
Russia. State Bank of India, the largest Indian commercial
Bank’s exposure in Russia is reported to be less than India and Russia could work on promoting mutual
US$ 10 million. However, according to reports, due to settlements of payments in national currencies as an
the worsening geopolitical situation, Indian banks have initiative for significantly increasing volume of bilateral
decided not to process any transactions involving Russian trade in the context of current sanctions. Central Banks of
entities due to global sanctions. Indian banks are currently both countries could work out the modalities, especially
exploring ways to circumnavigate the sanctions placed on pegging the rupee - rouble exchange rate for bilateral trade
Russian trade. Thus, implications of the current conflict on in consultation with both governments.
Indian banks are expected to be limited. Finding an alternative to bank transactions such as SWIFT
would also support a move away from dollar-based trade.
India as an Alternative Supplier of Products For instance, Structured Financial Messaging System
A positive possible benefit of the ongoing crisis is that (SFMS), a secure messaging standard developed by the
India could emerge as an alternative supplier of several IDRBT (Institute for Development and Research in Banking
of products which were being supplied by Russia and are Technology) Hyderabad to serve as a platform for intra-
currently facing supply disruptions. Indian exporters of bank and inter-bank applications may be promoted globally
these commodities could perhaps benefit from increased and use for cross-border transactions. The SFMS is built on
global demand for these commodities, emerging as an the lines of SWIFT, with several advantages and additional
alternative import source. utilities.
Towards Greener Energy and Increased Investment There are also possibilities of countertrade mechanism
where Russian banks and companies opening accounts
in Renewables
with a few public sector banks in India, which are having
Using unconventional energy in the place of crude, along limited foreign exposure, for trade settlement. This would
with increased used of electric vehicles (EVs) could help also require public sector banks in both countries opening
India to reduce its heavy dependence on imported fuel, branches in the other country. Funds in such accounts could
while cushioning the country from similar oil price shocks. act as a guarantee of payment for trade exchanged between
The present scenario is perhaps ideal for India to invest two countries, while the parties’ barter commodities from
more on renewables and alternative fuels and increase each other to offset the sum.
renewable energy consumption in the coming years, paving
way for greener energy in the country. The contents of the publication are based on information available
with India Exim Bank. Due care has been taken to ensure that the
SANCTIONS AND PAYMENT RELATED ISSUES information provided in the publication is correct. However, India
The sanction has led to several problems on India’s export Exim Bank accepts no responsibility for the authenticity, accuracy
front, which is largely related to payment issues due to or completeness of such information.
the sanctions in the banking system, along with leading For further information, please contact
shipping lines suspending deliveries to and from Russia,
Mr. David Sinate
resulting in sending fresh consignments difficult.
Chief General Manager
Export-Import Bank of India
Alternative Payment Mechanism - Settlement of
Maker Chamber IV, Floor 8
Payments in National Currencies Nariman Point, Mumbai – 400021, India
As a solution, an alternative payment mechanism could Phone : +91 22 – 22860 333
be established for engaging in economic and commercial E-mail : rag@eximbankindia.in
relations with Russia. Website : www.eximbankindia.in
Contact Numbers: Ahmedabad: (91 79) 26576852, Bengaluru: (91 80) 25585755. Chandigarh: (91 172) 4629171/73, Chennai: (91 44) 28522830,
Guwahati: (91 361) 2237607, Hyderabad: (91 40) 23307816, Kolkata: (91 33) 68261301, Mumbai: (91 22) 22861300, New Delhi: (91 11)
61242600, Pune: (91 20) 26403000, Abidjan: (225) 2720242951, Addis Ababa: (251) 118222296, Dhaka: (88) 01708520444, Dubai: (971) 43637461,
Johannesburg: (27) 113265103, London: (44) 2077969040, Singapore:(65) 65326464, Washington D.C: (1) 2022233238, Yangon: (95) 1389520.